Mark Carney's new challenge — reality

Welcomed as a conquering hero when he took up duties as Governor of the Bank of England, Carney is for the first time facing a British public (and media) that has begun to question his actions, even disagree with him

In a steely performance, the former Goldman Sachs banker struggled to demystify for the press the intricacies of “forward guidance” — advance notice that he’s not going to tighten monetary conditions too fast or too soon.

Welcomed as a conquering hero when he took up duties as Governor of the Bank of England two months ago, Mr. Carney is for the first time facing a British public (and media) that has begun to question his actions, even disagree with him.

“MP’s left puzzled as Carney charm wears off,” warned a recent report in the Financial Times that tried to make sense of the rock star central banker’s apparent fall from grace, as manifest in the tone of questioning from British MPs last week regarding his “forward guidance” policy, a key part of his approach to the job.

The Guardian headline was more colourful: “Mark Carney walks on water — but now he’s got his feet wet.” The former head of the Bank of Canada said in his first speech that interest rates would stay at the current rock-bottom level until unemployment fell to 7%, unless conditions changed requiring higher rates such as a spike in inflation.

In other words, the rate would stay low but it might not — a position that left the lawmakers a tad confused. According to the newspaper, Mr. Carney’s responses at times “sounded testy and his sporadic smile was rarely less than menacing.”

So much for forward guidance.

Of course, the former Goldman Sachs executive from the North West Territories had it easy during his previous job in Canada. The banks in this country mostly avoided the toxic investments at the centre of the financial crisis that began in 2008 and as a result were able to recover quickly from the recession that walloped much of the world, making the job of the central bank a whole lot less challenging than for many of its counterparts elsewhere.

Mr. Carney’s adopted country was particularly hard-hit. Despite recent signs of growth, the U.K. economy remains a basket case, with unemployment sitting at nearly 8%. GDP for this year is expected to remain anemic at best, less than 1.5%.

There were a lot of hopes resting on Mr. Carney’s shoulders when he came into the job and the reality is now starting to sink in.

Another potentially even more worrying challenge he faces is the U.S. Federal Reserve’s so-called tapering policy in response to what policy makers there believe are signs the economic turnaround is gathering steam. Tapering refers to a plan to reduce the amount of money being created as part of an extraordinary stimulus strategy that’s been in place since the crisis. Since the spring when tapering was first mentioned, bond markets not just in the U.S. but around the world have reacted sharply, with long term yields moving up dramatically.

The Bank of England, the European Central Bank and others tried to counter by announcing that their low rates would remain in force for the long term, but to no effect. Bond yields continued to rise.

As the world’s biggest economy, the U.S. is the 600-lbs gorilla of the fixed income world. When the U.S. Fed sneezes, the rest of the world can only hold on tight.

“What we’ve seen in recent months is that Mark Carney initially tried to talk interest rates down but then he got much quieter when it became clear that financial markets weren’t listening to him,” said Craig Alexander, chief economist at Toronto-Dominion Bank.

“People are also surprised at the last ECB meeting that the central bank didn’t try to talk down interest rates. In fact it was quiet about the fact that interest rates had risen. I think the whole reason why the ECB was quiet was the fact they recognized that nothing they said was going to have an influence.”